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Press release from CNW Group

China Health Labs & Diagnostics Ltd. announces financial results for the three and six months ended June 30, 2011

Tuesday, August 30, 2011

China Health Labs & Diagnostics Ltd. announces financial results for the three and six months ended June 30, 201109:00 EDT Tuesday, August 30, 2011TSX-V: CHOOTCQX: CHLBFwww.chinahealthlabs.comTORONTO, Aug. 30, 2011 /CNW/ - China Health Labs & Diagnostics Ltd. ("China Health" or the "Company") (TSXV:CHO; OTCQX:CHLBF), is pleased to announce the financial results for the three and six months ended June 30, 2011.The Company made progress in building on its position as a leading provider of total solutions for medical diagnostics and food safety testing in China. It achieved its business and financial goals during the three and six months ended June 30, 2011. Highlights include the following:Revenue grew by 67% to $8.095 million and profit grew by 24% to $1.413 million for the three months ended June 30, 2011, compared to the same period last year;Revenue grew by 60% to $14.854 million and profit grew by 80% to $2.636 million for the six months ended June 30, 2011 compared to the same period last year;Signed contract to install the BK Clinlab total lab solution in 587 rural hospitals in Jilin Province, China, with approximately 288 of the 587 BK Clinlab installations completed as at June 30, 2011, and the remaining 299 BK Clinlab completed subsequent to the second quarter; andStrong growth in sales of point of care technology ("POCT") diagnostic solutions to the Chinese military and government."The Company continued to show strong financial results during the first half of the year due to the growth in sales of our BK Clinlab rural total lab solution and our POCT diagnostic solutions," said Wilson Yao, CEO of China Health. "The Company's investment in developing diagnostic total solutions rather than individual products led to a strong first half of the year with new customers, including China's National Emergency Rescue Team for our POCT solutions and Jilin Province for our BK Clinlab rural total lab solution. We believe that in 2011 our growth will be driven by revenues and profits from the proprietary solutions we have developed."Revenue for the three and six months ended June 30, 2011 increased by 67% to $8.095 million and by 60% to $14.854 million, respectively, compared to the same periods last year. The growth in revenues was largely due to increased sales of POCT solutions to China's National Emergency Rescue Team and the contract to install 587 BK Clinlabs in Jilin Province, of which the Company had completed installation of approximately 288 BK Clinlabs as at June 30, 2011. Increased sales of testing equipment for food safety also contributed to the growth.The Company expects that in 2011 revenue seasonality will be similar to previous years with the first quarter revenues being the smallest due to the budgeting process of the Company's customers and Chinese New Year holidays, and the fourth quarter revenues expected to be the largest due to deliveries of products and services that have been ordered during the year.  Revenues for the three and six months ended June 30, 2010 accounted for approximately 14% and 28%, respectively, of total revenues of $33.705 million for the year ended December 31, 2010.Gross margin for the three and six months ended June 30, 2011 increased by 30% to $3.299 million and by 84% to $7.193 million respectively, compared to the same periods last year mostly due to the increased sales of POCT solutions and BK Clinlab rural total lab solutions. Gross margin as percentage of revenues for the three and six months ended June 30, 2011 was 41% and 48%, respectively compared to 52% and 42% for the same periods last year. The variance in gross margin as a percentage of revenues was due to changes in sales mix. The higher gross margin as a percentage of revenues for the six months ended June 30, 2011 was due to strong growth in high margin POCT solution sales. In the second quarter of 2010 the Company generated higher than average margin as a percentage of revenues due to the sale of POCT diagnostic solutions.The Company expects that gross margin as a percentage of revenues for the fiscal year 2011 will be comparable to fiscal year 2010, which was 39%.Administrative expenditures (excluding depreciation, amortization and share-based compensation) for the three and six months ended June 30, 2011 increased by 94% to $1.227 million and by 95% to $2.745 million, respectively, compared to the same periods last year. The principal reasons for the increase were increased overhead including employees and facilities to support a growing customer base and sales, as well as additional costs associated with being a public company since October 2010.Research and development expenditures for the three and six months ended June 30, 2011 were $0.012 million and $0.340 million, respectively, a decrease of 86% and an increase of 154% compared to the same periods last year. In 2010, research and development focused on POCT products for the Chinese military and improving the automation for certain diagnostic equipment. In 2011, research and development is focused on developing a full range of POCT solutions and improving the Company's proprietary lab management system. The Company is accelerating product development to maintain its competitive advantages in the sectors where it has developed unique proprietary solutions. Since the Company often collaborates with its customers to develop solutions, it is able to keep costs under control while developing products tailor made to customer needs.In late 2010, the Company signed a three-year research and development agreement with the Chinese Military Medical Equipment Research Institute (the "Institute"), based in Tianjin, and with the Third Military Medical University (the "University"), based in Chongqing. The program has four main goals: to improve the "Type B" diagnostic field lab; to develop a new mobile diagnostic lab to be contained in a vehicle; to evaluate and improve reagents; and, to develop a standard training program for military POCT field applications. The budget for the three-year program is RMB 10 million ($1.51 million), with China Health providing RMB 2 million ($0.30 million) and the Chinese military providing RMB 8 million ($1.21 million). China Health is providing three research scientists and the core technology. The R&D is being conducted in labs provided by the Institute and the University in Tianjin and Chongqing, including full science and technology teams. Under the agreement, China Health will own all of the intellectual property resulting from the R&D, including any improvements to the Company's existing technology and solutions. In addition, China Health will own all marketing and manufacturing rights and will have no restrictions on China domestic and international markets.Selling expenses for the three and six months ended June 30, 2011 decreased by 26% to $0.188 million and increased by 57% to $0.649 million, respectively, compared to the same periods last year. Selling expense as a percentage of revenues was 2% and 4% for the three and six months ended June 30, 2011, compared to 5% for the same periods last year. Selling expenses are expected to increase in subsequent quarters due to plans to expand the rural lab solution business to additional Chinese provinces and the food safety business to additional Chinese cities.Share-based compensation for the three and six months ended June 30, 2011 was $0.223 million and $0.411 million, respectively, compared with $Nil for the comparable periods last year. The share-based compensation expense is a result of granting stock options to its directors, officers and consultants in October 2010 and April 2011. The fair value of options granted on October 25, 2010 was estimated on the date of grant at $0.718 million, and the fair value of options granted on April 14, 2011 was estimated on the date of grant at $0.607 million using the Black-Scholes option-pricing model, which is being expensed over the vesting period ending on October 25, 2011 and April 14, 2014 respectively.  No options were granted by the Biochem Group prior to the Company completing its Qualifying Transation in October 2010, hence there was no share-based compensation in the comparative period.Government subsidy income for the three and six months ended June 30, 2011 was $Nil and $0.080 million, respectively, compared with $0.012 million and $0.042 million, respectively, for the comparable periods last year. From time to time, the Company will receive government subsidies for one of the PRC subsidiaries' value-added taxes collected on sales. There was no such subsidy granted during the three months ended June 30, 2011. A substantial government subsidy has been reported for the six months ended June 30, 2011 based on one of the PRC subsidiaries' value-added taxes collected on sales. The increase in government subsidy for the six months ended June 30, 2011 mainly arose due to increase in sales generated through this particular PRC subsidiary.Current income taxes recovery for the three months ended June 30, 2011 was $0.032 million compared with income tax expense of $0.353 million for the comparable period last year. The decrease in current income tax expense is due to the utilization of loss carry forward from the March 31, 2011 period-end. Current income taxes expense for the six months ended June 30, 2011 was $0.290 million compared with $0.410 million for comparative period last year. The decrease in income taxes is mainly due to an overall increase in income being earned by the legal entities which are subject to preferential tax rates.The Company's PRC subsidiaries are subject to income taxes at a statutory tax rate of 25% in China. Two of the Company's PRC subsidiaries have been granted preferential tax rates. One subsidiary is subject to PRC income taxes at 1% of gross sales and another PRC subsidiary is qualified for income tax exemption during the first two years of profitable operations followed by a 50% tax reduction in the next three years for engaging in R&D activities in a particular economic zone. The subsidiary received income tax exemptions in the year 2008 and 2009 with the years 2010 and 2011 being taxed at the 50% reduced tax rate.Profit for the three and six months ended June 30, 2011 increased by 24% to $1.413 million and by 80% to $2.636 million, respectively, compared to the same periods last year. Profit in the current three and six months ended June 30 represents 17% and 18% of gross revenue, respectively, compared to 24% and 16% of gross revenue for the comparable periods last year, respectively.The increase in profit is due to the growing customer base and sales, and to the growth in sales of rural total lab solution and POCT solutions, which generate higher margins than the Company's other products and solutions. However, the decrease of profit as a percentage of revenues for the three months ended June 30, 2011 was due to higher administrative expenses incurred to support the overall increase in the Company's operations and share-based compensation expenses and additional costs associated with being a public Company since October 2010, which were not incurred during the comparable three months ended June 30, 2010. Profit as a percentage of revenues for the fiscal year 2011 is expected to be comparable to profit as a percentage of revenues in fiscal year 2010 of 16%.Basic and fully diluted EPS was $0.02 and $0.04 for the three and six months ended June 30, 2011, respectively, compared to $0.02 and $0.03 for the comparable periods last year. The increased profits for the six months ended June 30, 2011 were partially offset by an increase in the average number of shares outstanding during the current period due to becoming a publicly trading company in October 2010 and the issuance of new shares since October 2010 arising from the exercise of stock options and share purchase warrants. The average number of basic ordinary shares outstanding for the six months ended June 30, 2011 was 65,097,415 (fully diluted 67,218,861), compared to 52,232,518 basic and fully diluted average shares outstanding for the comparable period last year.Cash totaled $3.368 million as at June 30, 2011, compared with $3.326 million of cash as of December 31, 2010. The Company's working capital as of June 30, 2011 was $19.144 million, compared with a $16.063 million working capital as of December 31, 2010.  Working capital increased by $3.081 million, or 19%, mainly due to an increase in inventories by $5.628 million and a decrease in deferred revenue by $2.864 million, which was offset by $0.600 million of reduction on short-term investments and $2.222 million increase in trade payables and accrued liabilities.The Company has sufficient working capital to fund the anticipated growth for 2011; however, the Company may need to access additional debt or equity funding if it enters into an agreement for a large number for total lab solutions or if it pursues suitable acquisition opportunities.Outlook & Growth StrategyThe Company believes that it can continue its strong growth in revenues and profits and build on the leading position it has established in China providing total lab solutions for rural hospitals and clinics, POCT solutions for military and emergency services, and food safety lab solutions, based on the size and growth of the Chinese market for medical diagnostics and food safety, the government support for the market and the Company's proprietary products and services and customer relationships.In 2011, China Health intends to expand its business by focusing its efforts on expanding its sales network to additional Chinese provinces and cities in the areas where it has proprietary products and limited competition. Going forward, China Health expects revenue growth from its total lab solutions business lines to continue to be stronger than growth from its traditional business with large urban hospitals, and to comprise a higher percentage of revenues.China Health will be hosting an investor conference call on Tuesday, August 30, 2011 at 1:00 pm (Eastern Time).The purpose of this conference call will be to provide investors with an update of the second quarter results of the Company. Representatives of China Health on the conference call will be:   Mr. Shiping (Wilson) Yao, President and Chief Executive OfficerMs. Judyanna Chen, Chief Financial OfficerMr. Adam Kniec, Consultant (former Chief Financial Officer)Mr. Kim Oishi, Member of the Board of DirectorsMr. Chao Zhang, Vice President, FinanceFollowing the update, a question and answer session will be held. To participate, the time and call-in instructions are as follows:DATE: Tuesday, August 30, 2011TIME: 1:00 pm (Eastern Time)Participant Dial-In Number(s): North America Toll-Free Dial-In Number: For Toronto and International Callers:  1 (888) 231-81911 (647) 427-7450A Taped Replay will be available from 3:00 pm Eastern Time on August 30, 2011 to 11:59 pm Eastern Time on September 13, 2011.Taped Replay Toll Free Number: 1 (855) 859-2056Taped Replay Local Dial-in Numbers:(778) 371-8506(416) 849-0833(514) 807-9274(403) 451-9481(613) 667-0035(902) 455-3955Taped Replay Password: 93539366About China Health Labs & Diagnostics Ltd.China Health, operating in China as the Biochem Group, is a leading diagnostic lab solution provider for the public healthcare industry in China. The Company develops and sells Biochem Group branded and third-party medical diagnostic products and services to diagnostic facilities in China. Customers include large urban hospitals, rural hospitals, Chinese military and rescue operations, the Beijing government and third-party distributors.In 2010, China Health had revenues of approximately $33.7 million, and intends to expand its business by focusing its efforts on expanding its sales network in three areas where it provides proprietary solutions, has limited competition and that are supported by Chinese government policy and budgets: BK Clinlab total lab solutions for rural hospitals and clinics, POCT solutions for military and emergency rescue services, and food safety solutions for large cities in China.Neither TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.FORWARD LOOKING INFORMATIONThis press release contains forward-looking statements and information that are based on the beliefs of management and reflect China Health's current expectations.  When used in this press release, the words "estimate", "project", "belief", "anticipate", "intend", "expect", "plan", "predict", "may" or "should" and the negative of these words or such variations thereon or comparable terminology are intended to identify forward-looking statements and information. The forward-looking statements and information in this press release includes information relating to revenues, gross margins and expenses for the fiscal year 2011, the capital requirements to expand its business through sales or acquisitions, and the expansion of the Company's business through its sales network in areas where it has proprietary products, limited competition and strong government support. The forward-looking information is based on certain assumptions, which could change materially in the future, including the assumption that the Company's revenues, gross margins and expenses will be as expected, its capital requirements to expand its business through additional sales or acquisition may require additional funding, and the Company will be able to expand its sales network and business. Such statements and information reflect the current view of China Health with respect to risks and uncertainties that may cause actual results to differ materially from those contemplated in those forward-looking statements and information. By their nature, forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements, or other future events, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the risk that the Company's revenues, gross margins and expenses may be other than as expected and negatively affect the financial results of the Company, the Company may not be able to access additional funding for its sales and acquisitions, and the Company may not be able to expand its business as expected through its sales network in any of the areas in which it has proprietary products, limited competition and strong government support. China Health cautions that the foregoing list of material factors is not exhaustive. When relying on China Health's forward-looking statements and information to make decisions, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. China Health has assumed a certain progression, which may not be realized. It has also assumed that the material factors referred to above will not cause such forward-looking statements and information to differ materially from actual results or events. However, the list of these factors is not exhaustive and is subject to change and there can be no assurance that such assumptions will reflect the actual outcome of such items or factors.THE FORWARD-LOOKING INFORMATION CONTAINED IN THIS PRESS RELEASE REPRESENTS THE EXPECTATIONS OF CHINA HEALTH AS OF THE DATE OF THIS PRESS RELEASE AND, ACCORDINGLY, IS SUBJECT TO CHANGE AFTER SUCH DATE.  READERS SHOULD NOT PLACE UNDUE IMPORTANCE ON FORWARD-LOOKING INFORMATION AND SHOULD NOT RELY UPON THIS INFORMATION AS OF ANY OTHER DATE.  WHILE CHINA HEALTH MAY ELECT TO, IT DOES NOT UNDERTAKE TO UPDATE THIS INFORMATION AT ANY PARTICULAR TIME EXCEPT AS REQUIRED IN ACCORDANCE WITH APPLICABLE LAWS.For further information: Babak Pedram Investor Relations TMX Equicom Group T: (416) 815-0700 ext. 264 Email: bpedram@equicomgroup.com